ORIX Corp (IX) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to ORIX Corporation's first quarter financial results conference call.

At this time, I would like to turn the call over to your moderator, Mr. Chun Yang. Please go ahead sir.

Good evening. This is Chun Yang, of ORIX Corporate Planning department and I would like to welcome you to the ORIX conference call to review our first quarter consolidated results for the period ended June 30, 2015.

I'm joined here this evening by Mr. Kazuo Kojima, Deputy President and CFO; as well as Mr. Shintaro Agata, Corporate Executive Vice President and Head of the Treasury Headquarters; and Mr. Takao Kato, Corporate Senior Vice President and Head of the Accounting Headquarters.

During this evening's call, I will go through the first quarter results and then we will open up the line to Q&A with Mr. Kojima, with the assistance of an interpreter.

I presume that everyone has in front of them the presentation materials that were posted on the IR section of the website this afternoon, Tokyo time.

The following live broadcast is copyright to ORIX. Statements made today may contain forward-looking information. While this information reflects management's current expectations or beliefs, you should not place undue reliance on such statements as our future results and business activities may be affected by a wide variety of factors that are out of our control.

You should read the forward-looking disclaimer in our earnings presentation as it contains additional important disclosures on this topic. You should also consult our reports filed with the SEC for any additional information, including risk factors specific to our business.

Also, please note that the net income used in this presentation is the same as the net income attributable to ORIX Corporation shareholders, as referred to in the latest financial statement titled, Consolidated Financial Results April 1 to June 30, 2015.

And without further ado, I would like to start the presentation from page 1 of the presentation material.

Net income for the first quarter was JPY81.5 billion, 24% increase compared to the same period last fiscal year.

ROE was 15% on an annualized basis.

Strong organic growth from each business segment and profits from Yayoi and Hartford Life Insurance, and other investees, have contributed to the overall profit increase.

During the same period last fiscal year, while we have recorded a number of large gains on sales of investments, we have continued to generate a constant stream of capital gains by exiting from our investments in this fiscal year. This has also contributed to the profit growth we have achieved in the first quarter.

The business portfolio that we have built up has generated stable earnings so far and on the other hand, we have been turning over our principal investment in real estate portfolio efficiently to produce constant profits.

During the last financial result announcement, we have stated that our mid-term target, we intend to build a business portfolio that can generate JPY300 billion by FY18 March, and I believe that the result of the first quarter demonstrated solid progress was made towards this new target.

Please turn to slide 2. Segment profit for the first quarter increased by 19% year on year, of which investment and operation, corporate financial services, real estate and maintenance leasing segment, have in particular been the driver behind this growth.

As for the retail and the overseas business segment, due to the capital gains relating to the sales of shares in the Monex Group and STX Energy, which were recorded in the same period last year, these two segments had negative growth.

Nevertheless, if you exclude the impact from these two capital gains, the underlying businesses in both retail and overseas business segments have achieved solid positive growth.

Please turn to the next page. Segment assets decreased by approximately JPY250 billion, or 3% compared to the end of last fiscal year. The segment that decreased the most was the retail segment, which was primarily due to the decreased number of life insurance policies held by Hartford Life Insurance, which amounted to about minus JPY150 billion.

There was also a minus JPY90 billion of ABS, which was executed and recorded in both corporate financial services and overseas business segment.

The ROA of the segment assets overall on an annualized basis was 3.6%.

Please turn to slide 4. The graph on the left shows the gross profit of the first quarter in the last three years. Compared to the same period last year, finance revenues in the first quarter remained rather stable but the life insurance premium and related investment income, sales of goods and real estate and services income, have all achieved positive growth.

Also, among the non-finance revenues, the breakdown of the services income is shown on the right-hand side of the page. Asset management and servicing-related incomes, have shown a strong growth. Other services income, such as facilities operation and automobile-related businesses, have all increased and contributed to the steady expansion of services income overall.

In the coming years we expect non-finance revenue to continue to play an important role in boosting the Company's profit growth.

Please turn to the next page. From here and onward I would like to explain first quarter results for each segment individually. I'll start with corporate financial services.

Segment profit doubled to JPY12.4 billion compared to the same period last year. In addition to the contribution from Yayoi which was consolidated in the fourth quarter last fiscal year, the original corporate sales unit had performed quite strongly and achieved profit growth year on year.

Finance revenues have decreased in line with the decreased lease and installment loan balance.

In terms of business environment, while we see domestic economic condition continuing to recovery steadily and loan demands from the SMEs trending upwards, rate competition in the market remained fierce.

If you look at the graph in the middle you can see that services income in this segment has grown quite significantly, of course the additional income contributed by Yayoi is very sizeable, our corporate sales unit has been generating strong fee revenues.

Another factor that contributed to the strong performance in the first quarter is the capital gains that we realized from selling investment securities that we have been holding.

Segment assets decreased due to the execution of JPY40 billion worth of ABS. Without this ABS, segment asset would have actually increased over the quarter. Segment asset ROA was 3%, and if we exclude the capital gains from the sales of investment security, which I just mentioned, it would still have been an improvement to the annualized 2.4%.

Please turn to slide 6. In the maintenance leasing segment, segment profit grew by 6% year on year to JPY11.7 billion. New transactions in the automobile-related business have been stable. Operating lease revenues also increased in line with the asset growth.

In terms of business environment, with the gradual recovery of Japan's economy, we are experiencing a steady recovery of new auto leases. Segment ROA remained high at above 4%.

Please turn to slide 7. Segment profits of the real estate business increased by 33% year on year to JPY14.5 billion. With the current strong real estate market, gains on sales of rental properties have increased. Of course, the current favorable market condition has been helpful, it should be noted that this goes to the result of leveraging our real estate value chain and expertize in adding values to each of the properties we invested in and generating gains on sales at a constant pace.

Furthermore, due to the increased number of tourists from abroad, our facilities operation business, namely hotels and Japanese inns, have benefited from this trend and generate a higher service income and contributed to segment profits.

Regarding the segment expenses due to the downsizing in asset reductions and reductions in write-off, segment expenses have decreased compared to the same period last fiscal year.

Segment assets have decreased by a little over [JPY30 billion] since the end of the last fiscal year, and as of the end of the first quarter we had come very close to the level of JPY800 billion.

Looking at the current market we believe it is still time to sell and we may continue to sell more this fiscal year, so the asset may go below JPY800 billion. Higher segment profit [and mixed] asset reduction have helped to improve the ROA to 4.7% in this segment.

Please turn to the next page. Segment profit for the investment operation segment increased dramatically at about 4.8 times compared to the same period last year, at JPY22.2 billion (sic - see slide 8, "JPY26.2 billion").

During the first quarter we have sold a number of investments and recorded capital gains. In addition, new investees that we have consolidated during the last fiscal year, including Net Japan, ARRK and INNOMEDICS, have made stable profit contributions.

DAIKYO on the other hand also had a good quarter recording higher revenues and profit with the increase in the number of condominium units sold.

For our environment and energy-related business, we have been making good progress in mega-solar business where we have secured a total of 760 megawatts of which 220 megawatts are in operation now. Services income from the environment and energy businesses, as shown in the graph in the middle, has been growing steadily and gradually contributing to the Group.

Segment asset, as shown on the graph on the right, has decreased by around JPY67 billion compared to the end of March, primarily due to the sales of the investment I just mentioned.

Amongst the specific business units, if you look at the asset in the environment and energy business, it has grown by around JPY50 billion compared to the same period last fiscal year. Please turn to the next page.

In the retail segment, segment profit decreased by 25% year on year to JPY21.6 billion. This is primarily due to the large capital gains of roughly JPY15 billion recorded in the same period last year, relating to the sales of Monex Group shares. Without this capital gain, this segment would have achieved positive growth year on year.

Life insurance premiums and investment-related incomes has been growing steadily as illustrated in the graph in the middle, where you can see the contributions from Hartford Life Insurance and the growth and momentum of ORIX Life Insurance.

Regarding segment assets, due to the surrender of insurance policies at Hartford Life Insurance, segment asset decreased by around JPY140 billion compared to the end of last fiscal year. Annualized segment ROA based on the first quarter result was 1.6% lower than last fiscal year due to a number factors, including capital gains from selling Monex shares and the bargain purchase gain related to the acquisition of Hartford Life Insurance.

Please turn to slide 10. Finally, the overseas business segment. The first quarter has produced segment profit of JPY34.5 billion, a 13% decrease year on year. During the last fiscal year there was a capital gain of around JPY16 billion relating to the sales of STX Energy, which explains the decrease in segment profit year on year.

In the Americas, revenues from corporate loans and incomes from fund investments have both increased, also Robeco's AUM increased significantly compared to the same period last year, and similarly asset management income has increased.

Segment asset of overseas business increased by about JPY30 billion compared to the end of March. This increase was due primarily to foreign exchange rate fluctuation rather than organic growth.

Certain businesses such as the aircraft business achieved asset growth by a new transaction, however, such increase in asset was offset by securitization of loans in the Americas at around JPY50 billion. And as a result, excluding foreign exchange rate impact, segment asset decreased overall in the first quarter.

Please turn to the next slide. Here I would like to conclude this presentation with a summary.

We have achieved net income for the first quarter of the current fiscal year of JPY81.5 billion, this is a 24% growth year on year and also a record first quarter net income in ORIX history.

In this first quarter, steady organic growth in each business segment, together with timely sales of a number of investments, were the drivers behind this record result.

For the coming second quarter, assuming there are no material changes to the business environment, we should be able to continue the same momentum as the first quarter. My presentation ends here.

Now Mr. Kojima and Mr. Agata and Mr. Kato will be happy to answer any questions you may have.

(Operator Instructions). Raj Chaudhary, Odey Asset Management.

Could you perhaps talk a little bit about the domestic corporate business? Are you seeing any increase in domestic capital expenditure and in leasing activity?

Basically we are seeing gradual improvement in terms of our customers' business activity as well as capital expenditures on that front.

So far the improvement appears not to be sufficient to drive an increase in leverage, yet as you noted, you made some ABS disposals. Could you maybe explain some of your thinking as to why you're releasing assets in the form of ABS and how you plan to redeploy that equity?

Regarding the ABS we executed in the first quarter, a part of it was in Japan and part of it was in the US.

The ones in Japan was part of our funding diversification strategy. And, so you understand, the funding environment at the moment in Japan is still quite good. Whereas the ABS, we executed in the US, these are COOs and forecasting the increase of interest in the United States, we believe now might be the time to adjust our exposure in this type of asset at this moment.

Thank you. That's very helpful and the rationale seems reasonable. But from the shareholders' perspective, that reduces the segment assets, as you mentioned, so creates a higher hurdle to sustain return on equity. So what plans do you have to either increase the asset base or reduce the equity base in order to enhance ROE?

Regarding what do we do with those capitals after we execute these ABS, basically we still see many opportunities in certain business fields.

In Japan, for instance, our environment and energy-related business, this is an area that we have been actively engaging in. And so [it may very well] we inject more capital into this field. It's one of the important areas that we're focusing on right now.

And outside of Japan, there are other ways of utilizing our capitals to more profitable businesses; for instance, aircraft or other private equity investment. And that's the basic thinking behind this decision.

Thank you.

(Operator Instructions). Paul Smith, PK Investment Management.

On page 7 you commented about your real estate exposure and you suggested that you think it continues to be appropriate to reduce your position. I suppose there are two questions; what would be the minimum level that you would look for, and what would be the catalyst for you to increase exposure to real estate?

Okay, to answer your first question; basically the baseline is still at JPY800 billion. Even though I mentioned that we may sell more and reduce it down further below that level, it's rather temporary. You may be looking at a level between JPY700 billion to JPY800 billion, but basically for the Company, for the management -- for our management plan, JPY800 billion is still the baseline.

And for your second question, catalyst; the current market condition, we think is not the right time to buy. It may be in the next few years, let's say, a market downward adjustment or a crash comes, we think that will be the right time to start buying again.

Does that answer your question?

Yes, that's very helpful. Can I ask a follow-up question perhaps? And maybe it's a delicate question, but with regard to DAIKYO, what is it these days that you're hoping to get from DAIKYO? I think they've restructured their business so that they're effectively looking for more maintenance-type, or rather condominium management-type revenues rather than building new condos and yet that doesn't to be such a profitable business. Are there any comments that you wish to make?

Yes, as you know very well, we've mentioned that we've been restructuring the Company, increasing the portion of our property or condominium management. It might be correct to point out that, that particular part of the business isn't exceptionally profitable, but nevertheless it produced -- yet it produced stable incomes and so that part will still continue. And that's our current plan for this particular project.

Okay. And may I ask one final question, please?

In answer to an earlier question you said that you see opportunities in the environmental and energy sectors in Japan. In particular with the energy sector, I wonder if you can remind us and perhaps elaborate on what you think you can do, particularly given the opaqueness of the energy strategy on the part of the government?

The current plan for our environment-related business, currently the segment asset is about JPY150 billion and we plan to expand it to about JPY450 billion in three years' time and that would include various kind of business, including Mega-Solar, that sort of stuff.

And because, for instance, Mega-Solar, this is under the government subsidy program feed-in tariff, so these are going to be very stable income streams and so that's that.

In terms of other new areas we can further develop, one example would be electricity retailing. This is one of those deregulations that we expect to see happening next year. And of course, there is not that much detail out there yet, but this may potentially be a very large market and we are currently preparing for that.

That's excellent. Thank you very much for answering the questions.

Raj Chaudhary, Odey Asset Management.

I had a follow-up question. On slide 4, you have kindly outlined an indication of gross profits and of services income. Am I right to think that you were trying to highlight the recurring portion of non-spread-based income in the right-hand chart? And does that approximate to operating profit? Or how should I interpret that chart?

On page 4, the graph on the left, the gross profit, this is just basically we're trying to illustrate that, based on the strategic direction that we have released before, that we want to expand our non-finance business going forward. And you can see the portion of our income coming from that particular side of the business, non-finance has been increasing in the last three years. So that's for the graph on the left.

And in terms of the graph on the right, services income, these are I'd say operating gross profit. They are after deduction of expenses, but they are before the segment SG&A. Does that answer your question?

Yes, very helpful. Thank you.

[Taichi Noda], Goldman Sachs.

Sorry, I asked question at the Japanese call too, but I'd like to ask only one question regarding Hartford Life Insurance. Are they contributing to the profit at this moment or not? And then, if so, how much is the contribution roughly to your retail segment profit?

Also, related to that, to the retail segment, this quarter, you have other segment expenses of [JPY59.9 billion.] Is that the normal level at this moment or are they --

I'm sorry, could you please repeat the second question again?

Okay. The retail segment, you've got the other expenses of [JPY59.9 billion].

Hang on a second. Other expenses.

After the interest and then after the loan provisions. Retail segment

Yes, yes.

Okay. So that's basically JPY59.9 billion, to JPY60 billion out of JPY62.7 billion, so [must be], all the expenses coming from that line. Going forward, are they stable -- stay at roughly around JPY60 billion or do they vary over the time? Thank you.

Okay, answers to your first question, the contribution segment profit from Hartford Life in the first quarter, it's about JPY7 billion.

And to answer your second question, other expenses, JPY59.9 billion, we expect this amount to stay roughly around the same level. Basically, the expenses coming from Hartford Life should gradually decrease but the expenses coming from ORIX Bank and ORIX Life Insurance, will gradually increase. They sort of offset each other, so we expect the final amount to be roughly around the same level going forward.

Thank you. Very helpful.

(Operator Instructions). Paul Smith, PK Investment Management.

It's actually Paul Kirkby for this question. You referred to the fact that you might be looking to apply more capital in the future to the environment and energy section. I just wonder, in the light of the recent announcement that you are, I think, currently the only bidder, jointly with [VINCI] for the Kansai International and Osaka Airport operation, which is, I think, is an [JPY18 billion] project over [four to five] years.

I guess you can't say much about it, but is that an area where you're looking to prepare capital for the future for what may or may not be a big commitment. And would that business come within the facilities management business? Where would it belong? Thank you.

Yes, there is very limited information we can disclose regarding this particular Kansai Airport project. But basically this kind of business, we call a concession business, mostly the regulation involving concession rights, we see this as a very big market, with a potential market size of [JPY70 trillion]. So yes, this is one area that we would like to challenge going forward.

And as for where do we put this on our reports, which segment, it hasn't been decided yet. We just have to think about it and decide as we go along with the project. We're still at a very early stage of the project.

Thank you.

(Operator Instructions). Mr. Yang, there are no further questions today. So, at this time, I would like to hand the conference back over to you for any additional or closing remarks.

Yes, so if there is no more questions, Mr. Kojima here has some final words he would like to share with you.

This is Kojima. These first quarter results proved to be a good starting line with our new strategic direction that we have announced. As the Company's new CEO, I will do my best to ensure the Company maintains its financial [strength] and stay focused towards achieving mid-term target.

Having said that, I appreciate your continued support to ORIX until now and also in the future. Thank you.

Thank you for participating in tonight's conference call. If you have any questions or comments, please do not hesitate to get in touch with us using the contact information found on the last page of this evening's presentation materials.

Also, a replay of this conference call will be available shortly on the ORIX IR website if you joined part way through and would like to listen to certain sections again.

On behalf of the management and the entire ORIX Group, thank you for your participation. I hope that we have the chance to meet, whether it is in your corner of the world or here in Tokyo.

That concludes today's conference. Thank you for your participation and you may now disconnect.